Two Italian Zombie Banks Toppled Friday Night

Authored by Wolf Richter via, 

ECB shuts down Veneto Banca and Banca Popolare di Vicenza.

When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!

It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.

The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.

In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they “were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.”

“Failing or likely to fail” is the key phrase that banking supervisors use for banks that “should be put in resolution or wound up under normal insolvency proceedings,” the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation. The ECB explained:

The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward.


Consequently, the ECB deemed that both banks were failing or likely to fail and duly informed the Single Resolution Board (SRB), which concluded that the conditions for a resolution action in relation to the two banks had not been met. The banks will be wound up under Italian insolvency procedures.

And the ECB provides a little history of its failed efforts to put these banks on the right track:

ECB Banking Supervision has closely monitored the two banks since capital shortfalls were identified by the comprehensive assessment in 2014. Since then, the two banks have struggled to overcome high levels of non-performing loans and underlying challenges to their business models, which resulted in further deterioration of their financial position.


In 2016, the Atlante fund [Italy’s government-sponsored “bad bank” set up in Luxembourg to take toxic assets off Italian banks books] invested approximately €3.5 billion in Veneto Banca and Banca Popolare di Vicenza. However, the financial position of the two banks deteriorated further in 2017.


The ECB had therefore asked the banks to provide a capital plan to ensure compliance with capital requirements. Both banks presented business plans which were deemed not to be credible by the ECB.

So nothing worked. Private sector money stayed away in droves. JP Morgan, which had been recruited to save the Italian banks, threw in the towel. These banks had been zombies for too long. Everybody knew it. But the government kept denying it.

Just weeks ago, Italy’s Minister of Economy Pier Carlo Padoan insisted that the two banks would not be wound down. Last year, to dispel the mountain of evidence to the contrary, he insisted that that there would be no need of any future bail outs; and that, furthermore, Italy did not even have a banking problem.

In early June, the two banks were instructed by the European Commission to raise an additional €1.25 billion in private capital. No one bit. Italy’s government then tried to persuade the European Commission and the ECB to water down the requirement to €600-800 million, and it urged Italian banks to chip in to the bank rescue fund.

All that failed. So this weekend, the Italian government gets to sit down together for a friendly chat to enact the necessary measures to protect depositors and senior bondholders in those two banks. Stockholders will be crushed. Junior bondholders will likely get slammed hard. And the Italian taxpayer might face some additional pain – all of it caused by many years of terrible and reckless bank management. The saga of the long-festering banking crisis has thus moved on to the next chapter.

A new era has begun in Europe. And it started in Spain. Many Banco Popular investors were wiped out. Taxpayers are off the hook. Read…  “Bail-In” Era for Europe’s Banking Crisis Begins


38BWD22 El Vaquero Sat, 06/24/2017 - 10:40 Permalink

  We are on vacation in Turin (NW Italy).  Just three or so hours ago I pulled 250 euros from an Intesa-San Paolo ATM machine (funds from my US account).  No problems.  I'll try to get an Italian paper later today to see what their press has to say.Yeah, I'll pull 250 euros more tomorrow... EDIT: There is apparently a Bitcoin ATM here in town which I will check out ASAP (some things are more complicated to do it Italy than at home).  I also saw an Austrian 20 florin gold coin at 225 euros (not a bad price, 0.1867 toz AGW) that I'll try to grab on Monday.

In reply to by El Vaquero

el buitre El Oregonian Sat, 06/24/2017 - 12:39 Permalink

The CoCo bond scam will certainly be "triggered" and converted instantly into the now worthless equity. Since the vast majority of the CoCo holders were just would-be regular CD depositors who were suckered by corrupt and stupid financial advisors, there is going to be a lot of anger there. Be interesting to see how far up the pyramid the haircut on the junior bond holders will go.  The ECB will avoid bailing in straight depositors as long as possible after the Cyprus debacle.  It would obviously create a run on all the banks.  Good for PM and cryptos, short term for T-bills.  The ECB will only bail-in the straight depositors when the derivative market implodes which in the USSA for sure, make the derivative "winners" more senior than straight depositors in terms of bank "resolution" as well as FDIC and the ECB equivalent insurance fund pay-outs.  Or as the famous Gene Wilder line goes, "You Get Nothing! You Lose! Good Day, Sir!"

In reply to by El Oregonian

jm RozKo Sat, 06/24/2017 - 10:33 Permalink

It is hard to say.  In the case of Banco Populare, bail-in means that subordinated creditors get marked to zero.  On the face, this looks like a big "screw those nasty creditors, taxpayers are off the hook".  Longer-term, this COULD mean that creditor will refuse to buy AT1 (coco) debt. Banks become capital-starved and this hurts the economy. This will make the finanical system far more fragile.Taxpayers that are debtors (nearly everyone) are thus not off the hook. Taxpayers debtor or not, are on the hook for recapitalizing bad banks.  It could be that things works out well under the bail-in.  If depositors, creditors and shareholders becoem more discriminating it will make banks management of asset and capital more prudent and everything works out.  Not sure that history bears this out. Ever. It all seems very ideological.This logic plays out over a long period of time. It isn't going to dominate what happens tomorrow.  AT1 issuance uptake will be the data that validates how this plays out.My read is that Brits are too pragmatic to screw sub-creditors right and left without some sort of mitigating policy.  The French are too far-sighted to screw sub-creditors right and left.  Everyone else in the EU is bound by Teutonic devotion to ideology... until a German bank with lots of patronage to German politicians hits the skids.  Then it will be "you did what we said, but we done different."     

In reply to by RozKo

chubbar jm Sat, 06/24/2017 - 10:36 Permalink

If the business model of banking doesn't work without massive subsidies, why allow the banks to exist? Is it in order to conjure money out of thin air in the form of loans so that the economy can grow (or at least not implode due to monetary contraction)?If so, then this monetary system is the culprit behind this unsustainable model. The politicians need to acknowledge this and move to remove/dismantle this system in favor of one more sustainable.

In reply to by jm

jm chubbar Sat, 06/24/2017 - 10:56 Permalink

The business model for banks is and always has been being the risk absorbers for the entire economy regardless of monetary system.The only difference is that now the cost of excessive risk taking has been socialized.  It has been socialized because debt levels written to zero will destroy the entire architecture of modern life, not just the ornamentation called the banking system. Yes, the sun will come up tomorrow, but anyone with a stake in modern life understands the issue. Doomsday preppers and amish don't care because they have nothing to lose. Managing the debt levels down will take decades for the vast majority.Think about it this way... historically, a reinsurance firm carried the same optionality as a bank. In the past, without socialization of losses, reinsurers and banks facing insolvency would take what little capital they had and leave town and restart somewhere else. Or be caught in the act and tarred and feathered. Reinsurance still operates this way because their risk is uncorrelated and idiosyncratic. Bank risk is systemic and correlated and thus catastrophic. Nothing is so simple under these conidtions.  

In reply to by chubbar

CRM114 jm Sat, 06/24/2017 - 18:31 Permalink

Actually, in one sense, it is quite simple. Both the Governments and the banks are acting criminally, and they know it. The Government has no plan to ever balance the books, and the banks are lending to people they know, on an averaged risk basis, can't repay. Both of them expect the taxpayers to take the hit.What's complicated is that these b@stards no longer care at all whether what they are doing is criminal, just whether they can be convicted of it. It's just a legal game, but it is utterly unjust and immoral.

In reply to by jm

SoDamnMad chubbar Sat, 06/24/2017 - 12:26 Permalink

The are so many NPL tied to real estate in Europe. A project is conceived a decade ago, land is acquired (many times at prices of what they think it will bring with the project built on it).  Then to the government toget acceptance (where the bribes are required).  Then to the banks and financers to get the money. Then to the architects to design. Then to the contractors when demolition and construction start. Fine if you are building into an expanding economy. Terrible if you are completing when everyone else is too into a declining economy.  I really was shocked in Hurgada, Egypt 2 years ago in the winter on a sucky vacation.  It looked like part of Allepo.  Street after street of unfinished structures;  6 floors plus with nothign but columns and floors. A whole lot of investors though all the Europeans woudl flock in to buy apartments to escape the winter cold.  Now the Muslims have flocked into Europe to get back at the investors who never showed up.

In reply to by chubbar

29.5 hours Sat, 06/24/2017 - 10:08 Permalink

"Just weeks ago, Italy’s Minister of Economy Pier Carlo Padoan insisted that the two banks would not be wound down... he insisted that there would be no need of any future bail outs; and that, furthermore, Italy did not even have a banking problem."It is good to know Italy's banks are in such able, confident, calming hands.

small axe Sat, 06/24/2017 - 10:08 Permalink

... caused by many years of terrible and reckless bank managementNot quite. How about "caused by many years of Ponzi fractional reserve banking." The "terrible and reckless managament" simply shows that the desired wealth transfer was not handled properly, the banker's greatest sin.

Bam_Man Sat, 06/24/2017 - 10:11 Permalink

Senior bondholders were NOT "bailed-in". They get away UNSCATHED.Italian TAXPAYERS get stuck with the resulting "bad bank" and 10 BILLION Euro in losses.EU bail-in "rules" were ignored. What a surprise.Total bullshit.